FOREX-Dollar pauses after U.S. jobs report gives it a boost

LONDON, Feb 5 (Reuters) - The U.S. dollar paused on Monday after rebounding at the end of last week, when a strong jobs report suggested the currency’s weakness might have gone too far, too fast.

The U.S. payrolls report on Friday showed wages growing at their fastest pace in more than eight years, leading to a rebound for the dollar, which had been stuck at three-year lows after a months-long sell-off.

With equity markets falling and bond yields rising as traders built in higher inflationary expectations and speculated that central banks would raise interest rates more aggressively, dollar bulls hoped sentiment would shift, supporting the U.S. currency.

The dollar index against a basket of six major currencies stood little changed at 89.175 after gaining 0.6 percent on Friday.

Against the euro, the dollar hovered at $1.2445, down from the three-year low of $1.2538 it reached last week.

The dollar held above the 110 Japanese yen mark after reaching 110.485 yen on Friday, rallying from a four-month low of 108.280 on Jan. 26. It pulled back later as the spectre of inflation knocked U.S. stocks lower.

“Although stock market weakness is weighing on the dollar against the yen, the tide appears to have turned for the currency after the U.S. jobs report,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“Speculators had gone excessively long on the yen, perhaps on misguided expectations towards Bank of Japan policy. But the U.S.-Japan yield differential is now too wide to be ignored.” Ishizuki said.

With benchmark Treasury yields reaching four-year highs after the jobs report, the U.S.-Japan 10-year yield spread stretched to its widest since late 2007.

The dollar had dropped against the yen when the Bank of Japan trimmed the amount of Japanese government bonds it bought at a regular debt-purchasing operation early in January. Some market participants took that as signal that the central bank was preparing to end its easy monetary policy.

The Australian dollar traded at $0.7929 after touching $0.7891, its lowest in three weeks following a 1.5 percent fall on Friday. The Aussie had advanced to $0.8136 late in January, its highest in more than two years.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Shinichi Saoshiro, editing by Larry King)